Washington's Lack of Focus Puts Recovery at Risk

It is astonishing that four months after the election, not a single Treasury Under-Secretary or assistant has yet been appointed, leaving poor Tim Geithner home alone. Several weeks ago, ex Fed Chairman Paul Volcker called this delay 'shameful'. Partly, this chaos reflects the santimonius and impractical ethics standards set by the Obama administration, which have scared off many prospective candidates. In the Great Depression, FDR hired Wall Street operator and bootlegger Joe Kennedy to run the newly created SEC on the basis that it takes a crook to catch one. Instead we're getting yet more lawyers, and even they can't get confirmed by Congress, which is dangerously grandstanding at a time we need a sense of urgency. It's strange that key State Department officials, from Hillary Clinton downwards, were selected even before Obama's inauguration and dozens of them confirmed by Congress in the past two months and yet the economic team is in such disarray that it is proving incapable of launching a coherent response to the ongoing financial crisis.

This is causing serious concern internationally, as well as in the markets. The French finance minister said recently that it was 'imperative' for the United States to get its banking system up and running. 'The successive announcements by Treasury Secretary Tim Geithner, gave markets an impressionist sentiment,' she said. 'If they reacted badly, it's maybe because they sense the unfinished side of these plans.' That's a fair analysis. Aside from the lack of a team at the Treasury to implement policy, however half-baked, the nature of the relationship between Larry Summers (Chief Economic Adviser), Geithner, and Paul Volcker is clearly tense, perhaps because it has been so poorly defined by Obama himself. Volcker has blamed Summers for slowing down the effort to organize the recovery advisory board he chairs. He has also complained that Summers doesn’t regularly invite Volcker to White House meetings and is unwilling to collaborate on policy ideas. It all sounds like the kind of petulant behaviour that isn't tolerated at my son's nursery school.

Meantime, the US banking system remains chronically undercapitalized as it faces rising credit card and car loan deliquencies (see Amex yesterday) on top of the mortgage mess. The complex and incomplete 'bad bank' plan is supposed to leverage both public and private capital to buy toxic bank assets using government financing. The initial funding is coming from the remains of the $700bn financial rescue fund, but a “placeholder” provision in President Obama’s fiscal 2010 budget plan sugests a possible request of around USD750bn in new funds. Neel Kashkari (remember him? The ex Goldman Sachs Mini-Me to Hank Paulsen's Dr. Evil?), is still the Treasury’s interim administrator for the USD700bn rescue fund. He said last week that private investors are ready to invest in distressed mortgage assets if they can get financing. Was that a subtle attempt at humor? The lack of private financing and risk appetite is the whole problem guys, so good luck with finding those investors.

The bad asset plan is coming hot on the heels of the $1trn TALF (it's a bull market in bailout acronyms if nothing else), which is meant to boost consumer lending to 2006/7 levels, although I think the overlooked issue is falling demand for credit as much as supply of it as the US consumer delevers in the face of historic wealth destruction in the last 12 months and an uncertain income outlook. That fast rising 5% US savings rate reflects a big cultural shift in behaviour that government policy ignores at its peril.

I think the lack of decisive leadership and focus in the Obama Administration's response to the financial crisis is now probably the most dangerous threat to prospects of economic recovery in 2010 and beyond. A rational template to deal with this crisis has now broadly been agreed by global institutions like the IMF requiring lower consumer taxes, infrastructure and other public works investment, monetary expansion including quantitative easing where necessary to support bond markets, and after drawing a line under toxic assets, a ruthless restructuring of recapitalized banks. It's time to stop the childish bickering in Washington and get on with it.

Disclosure: None

Comments

[AlexS:]

Ah, come on, it's not like Obama's ever done this before. Or anything like it, really. If you wanted someone experienced in business matters you should have voted for Romney like I did.

Mar 17 11:19 AM

[Carlos Lam:]

Good article, though Mr. Maher shows his Keyensian colors at the end. It is absolutely true that the economy loathes ambiguity, fuzzy plans from Washington. Businesses simply cannot plan for the future when they do not know what's going to come down the pike. Austrian economist Robert Higgs calls this "regime uncertainty." The trial balloons floated by the Administration (i.e. bad bank, 4.5% 30-year mortgages, "shovel-ready" projects) simply knock participants off their stride. Hank Paulson's TARP -- he requested money to supposedly buy bad assets and then used it to re-capitalize banks -- is yet another example of "regime uncertainty." Best to choose one direction and keep at it...better yet, let bad banks fail, allow automakers to go into bankruptcy, and allow home prices to keep falling to reasonable levels!

Mar 17 11:22 AM

[ArkansasAngie:]

Who wants to work for the FEDury when there is such a good chance you'll have to:
* duke it out with some political hack every day
* take the fall for some seriously flawed policy decisions (That may or may not be yours)
* lie
* work long hours for government wages
* expose every little thing you've done in private for public consumption
* take daily ridicule from every concievable direction

Not me.

Mar 17 11:44 AM

[J. D. Swampfox:]

The Administration seems to be delaying but the reason is not completely clear. Many have said that bank bondholders need to take haircut, probably from being forced to exchange their bonds for equity in the banks. But, if governments force this equitization, then a default event occurs and all the off-balance sheet CDS's written on those bonds become payable.

To avoid the panic that would come from equitization - they simply ignore the problem and put forth a new smoke screen: the unworkable scheme called the TALF, that private investors will likely never get on board with.

Mar 17 11:59 AM

[PainfullyAware:]

Anyone Expecting Rational Action And Accountability Out Of Government At This Point Does Not Understand The Current Way Government Works. (Do Not Look To The Constitution; Its Guidance Was Given Up Long Ago)

This is a CORPROTOCRACY where money buys influence and legislation. K-Street and various "Think Tanks/Clubs" are in firm control of policy. (Think Second Bailout Legislation and the fact that none of the legislators read it before they passed it; this is just one example of many)

When you use yourself, and your morality, as the mean you will always be disappointed. To Assume Benevolence, Especially When Action And Event Show Otherwise, Is Foolish.

For Now “The Great OZ” Still Reigns. The Curtain Continues To Deteriorate.

Mar 17 03:57 PM

[yellowhoard:]

"A crises is a terrible thing to waste."

Why not keep the crises going through inaction? Why not have every monster of a "recovery bill" pass in the middle of the night with no scrutiny. They are ramming socialism down our throats as the masses scream for them to "do something".

On the other side of this leglislative orgy is France. Not the smart part with nuclear power and high speed rail. Rather, we'll get the crappy part, with 80% tax rates and year long waits for angioplasty.

Mar 17 06:11 PM

[JK Corcoran:]

I think the real crisis has moved from bailouts, changing rules and inaction to something much more sinister. The AIG hearings are opening a new front on government attacks on capitalism. Congress is attempting to take control of and modify contracts. This is an attack on the very underpinning of a capitalist society. All trade whether local or international depends on the ability to have a contract and know it can be enforced. If contracts become subject to the whims of our government, who will want to trade with us? In the bigger picture, who will want to buy our debt? If the congress can change, tax, and/or invalidate contracts with companies and employees why not invalidate the government's treasury bill contracts?

Mar 18 12:10 PM

[fireball:]

let's give them a couple of billion to study cow-farts so they can keep their heads where they belong. (sorry cows).
let the citizens get on with dealing with this painful situation. govt has shown they can only make things worse.
socialism is the great failure. the u.s. does not need to prove it again.

Mar 18 12:25 PM